Find the right formula

This year, attention will be heightened by the growing concern that the government is to announce a switch in the formula from one inflation measure to another. While the change from using the retail price index to the consumer price index in the rent formula might seem arcane, it is of crucial importance to landlords and their business models.

The latest inflation figures for July show RPI running at 4.8 per cent and CPI at 3.1 per cent. One larger landlord has estimated that if these figures are extrapolated over 20 to 30 years (the life of many business plans) the difference in income to the sector as a result of any switch to CPI could be as much as £20 billion. As yet, the Communities and Local Government department has batted away questions on this subject, citing the upcoming comprehensive spending review. So, just how concerned should landlords be?

As they don’t (yet) keep their rents, the implications for local authorities and arm’s-length management organisations are few.

For associations, even though the government has yet to show its hand, the mood is ominous. As this week’s report from think tank the Institute for Fiscal Studies on the emergency Budget showed, in other areas of welfare spending the government is already committed to changing its formulae to use CPI as opposed to RPI.

The attractions of such a switch for tenants and the bloated £21 billion housing benefit bill are obvious. There is, however, a clear argument against it. Regardless of what the government does, housing associations will continue to see costs for maintenance and staff rising at open market rates. Although landlords have a duty to manage these costs, with a drop in income their ability to provide additional resources to work in their communities would be restricted. At a time when the government is trying to build the ‘big society’ this seems wholly counter-productive.

Whether this year or next, however, this seems an argument landlords are likely to lose.